Technology Outsourcing Booms in Retail Space

Though various government and academic institutions say we're entering into economic recovery, the recession continues to be a reality in the retail industry, with consumer confidence remaining weak going into the holiday season.

According to a new report by independent market analyst firm Datamonitor, this means companies in Western Europe and North America will increasingly look to outsource technology processes in a bid to cut costs and focus on core skills. The report, "Retailing in a Recession: The Opportunities for Outsourcing," looks at the business processes retailers are outsourcing and why. The report was generated by speaking with industry insiders in retail and technology vendors and bolstered by independent research on the topic.

In this economy, the priority for retailers is to protect margins. In a climate of falling sales, while facing cost and finance pressures, cost cutting has become the main priority in retail, and any option for reducing loss is being considered. This has been a prime opportunity for technology outsourcers and represents a business that's not likely to disappear in the recovery. Companies realizing that tech processes are not a core element of what they do will likely continue to feel this way during the recovery.

"Generally, once companies make a move to outsource, it becomes difficult for them to bring processes back in-house," said Neil Hendry, vice president of consulting – consumer markets, retail markets and financial services at Datamonitor. "First of all, they've obviously made an investment to outsource in order to secure presence in the future and economic gains and advantages. To unravel that process takes considerable amounts of investment and time, so as we move into recovery we actually could see an acceleration of that process rather than a [reversal] of the process."

To capitalize on this trend, technology outsourcers need to understand that the retail space demands simplicity and functionality above all else.

"Retail at its core is actually quite a simple business," Hendry said. "People walk into your shop; you have something on the shelf; they buy it. But the key to modern retail and where outsource operators can add real value is ensuring that systems and processes actually work to facilitate stock management and legitimate flows, making the consumer experience better but simultaneously ensuring that in order to do so, retailers do not have to double the cost of inventory that they hold. They need to understand the logistics, consumer and category interfaces that are so crucial and important to a retailer's business."

"Because someone outsources doesn't necessarily mean jobs leave North America; that's not a given," Hendry said. "However, obviously experience shows that a lot of work will end up in India and increasingly in Eastern Europe. The key, though, for an outsource operator is ensuring that their systems and processes and therefore the people that they serve within their organization actually understand the dynamics of the business for which they're working."

To do so, Hendry pointed out, outsource operators need a keen understanding of the countries in which they're operating. Such understanding is difficult to engender across an ocean.

"One of the peculiarities of retail compared to a lot of other industries is that it's essentially a very local business," Hendry said. "Retail concepts do not necessarily translate well in a global environment; the way the consumers shop in the U.S. is different from the way consumers shop in the U.K. and different again from the way consumers shop in, say, India and China and other emerging markets. So retail IT systems need to be managed by somebody who has a strong understanding of the issues affecting retailers in a particular country rather than somebody who is just looking at something purely from a process or a system perspective in an office 5,000 or 6,000 miles away."

The ultimate winners here, Hendry said, are consumers. Hendry said, "Retail looking to focus on their core business and operations can only be a good thing for consumers in the medium to long term, and should hopefully provide retailers with greater efficiencies and therefore better profit outcomes, but also should have an overall impact on ensuring that retail prices in the U.S. are kept under control as well as part of any savings that are obviously made and passed on to consumers."